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7/22/2014 @ 1:03PM113,760 views

Bill Ackman's Big Herbalife Reveal Bombs With Investors

Hedge fund billionaire William Ackman promised to deliver a deathblow to HerbalifeHerbalife from a Manhattan stage, but his long presentation on Tuesday bombed with investors and left the diet shake seller unscathed.

Herbalife CEO “Michael Johnson is a predator,” Ackman said fighting back tears as he wrapped up the second hour of the presentation while referring to his family’s American story, which started when Ackman’s great-grandfather immigrated to the U.S. from Russia. “This is a criminal enterprise.” Ackman called Herbalife a $24 billion “scam.” “The fraud is affecting more and more people,” said Ackman. “It is time to shut the company down.”

Shares of Herbalife rose steadily in the morning after Ackman started giving his talk on Herbalife’s nutritional clubs, increasing by 8% to $58.40 in the first hour of the presentation. Two hours into the talk the stock had risen by 11% to $60. That’s a little higher than the shares were changing hands for on Monday before Ackman drove down the stock by 11%, saying he would be delivering “the most important presentation that I have made in my career.” Ackman had promised in a CNBC interview on Monday that “we won’t disappoint.” Ackman’s presentation was still going on at 1:07 p.m., with the stock up by 15% to $62.22. During the presentation, Ackman suggested that Herbalife had been repurchasing shares in a material way on Tuesday. Shares of Herbalife continued to rise after the three-hour presentation ended, closing at $67.77, up 25% for the day.

Ackman’s presentation clearly did disappoint investors that had anticipated on Monday that he would inflict serious damage to the company’s shares over the short term. Ackman calls Herbalife a pyramid scheme and his Pershing Square hedge fund has been betting against the company’s shares in a big way since December 2012. Herbalife CFO John DeSimone said in an interview on CNBC on Tuesday that Ackman’s “bark is always worse than his bite.”

The company, which has vigorously denied Ackman’s accusations, said on Tuesday that Ackman was trying to drive down Herbalife’s shares over a relatively short period because a “substantial portion of the bet expires on January 17, 2015,” referring to put options Ackman purchased when he restructured his short position in the company’s shares. Circumstantial evidence suggests Ackman’s put options are currently not in the money.

Ackman’s presentation focused on Herbalife’s nutritional clubs in the U.S. and some foreign jurisdictions that generate a big chunk of the company’s revenue, detailing the findings of a seemingly large investigation that included undercover investigators, audio and video evidence, and documents leaked by Herbalife employees. Ackman said that he has spent $50 million on his Herbalife-related work.

In essence, Ackman argued that many of Herbalife’s nutritional club consumers are really distributors, often poor and Hispanic, in training to get certified and are being tricked by deceptive income claims into spending large amounts of money in small increments in a way that keeps them continually paying for goods and services they can not afford.

During the presentation, Ackman invoked Enron, Bernard Madoff, totalitarian regimes and even the Nazis. “The big lie is used by totalitarian regimes, and by the Nazis and by lots of people and people generally believe big lies because they are so bold that how can they possibly be false,” Ackman said. He criticized former Secretary of State Madeleine Albright for supporting Herbalife and claimed that Albright had successfully used her connections to make sure the company could continue to operate in the key China market after Ackman had attacked Herbalife’s China operations earlier this year.

During his presentation, Ackman lashed out against many of Herbalife’s other high-profile supporters, including soccer stars David Beckham and Lionel Messi, suggesting they were being paid off to support a scam. Ackman highlighted Herbalife board members like former Surgeon General Richard Carmona and one of the company’s advisers, former Los Angeles Mayor Antonio Villaraigosa. He said that another prominent Herbalife spokesman, Nobel prize winner Louis Ignarro, has made $21.2 million from the company and was “the wealthiest Nobel laureate.”

Ackman also went after the investment community. He frequently criticized John Hempton, who runs a relatively small hedge fund in Australia and has been a vocal Herbalife bull, but Ackman did not say anything bad about Carl Icahn, the billionaire investor who is Herbalife’s biggest shareholder.

In another accusation, Ackman said that Tim Ramey, the former bullish analyst who covered Herbalife, may have been fired by D.A. Davidson and hired by Post Foods in the strategy department to make the exit look better to those closely watching the Herbalife saga. Ackman highlighted the fact that William Stiritz, who personally owns a big stake in Herbalife, is the CEO of Post Foods. “I find it striking that if I were a Post shareholder that we are spending Post money supporting a trade that is Mr. Stiritz’s trade personally,” Ackman said. At the same time, Ackman called Stiritz one of the “great CEOs of all time,” adding that he had asked to meet with Stiritz but Stiritz declined. Ackman pointed out that a business book that he feels is important and that he used to promote his backing of Valeant Pharmaceuticals’ hostile takeover effort of Allergan highlights Stiritz’s business career. After the presentation, both Ramey and D.A. Davidson said that Ramey had not been fired by his former firm.

In the end, Ackman is hoping that federal regulators or law enforcement on either the state or federal level will launch some sort of action that will hurt Herbalife’s operations in a material way or shut it down. Government investigators and regulators were no doubt an important intended audience on Tuesday for Ackman, who said during his presentation that he wished the Federal Trade Commission well in its investigation,which was disclosed earlier this year. He noted that the Department of Justice and the FBI had also launched an investigation, but lamented that the Securities & Exchange Commission had not brought an enforcement action against Herbalife after investigating it for a long time. “That is a failure on the part of the SEC,” Ackman said.

“Herbalife, the customers are fictitious, the business opportunity is a scam, the university degree is a fraud,” Ackman said.

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